Exercise 8 - Calculating and Comparing Return on Invested Capital (ROIC) Apple v. Blackberry Return on Invested Capital (ROIC) is a profitability ratio that measures how effective the firm is at generating a return for investors who have provided capital (bondholders and stockholders). The ROIC calculation answers three questions: How tax efficient is the firm? How effective are the firm's operations? How intensively does the firm use capital? Comparing the answers to these questions between firms can help you understand why one firm is more profitable than another and where that profitability is coming from. In the following. Apple's ROIC is compared to Blackberry's. The income statement and balance sheet are provided for both firms. While the ROIC calculation for Blackberry is completed below, you have to complete the calculation for Apple by supplying the correct income statement and balance sheet information. As you fill in this information, the components of Apple's ROIC will be calculated along with some supporting ratios. Use these subcomponents and supporting ratios to compare Apple and Blacberry's performance. Where does Apple's advantage come from? This activity demonstrates the calculation of ROIC and the comparison of firm performance, supporting Learning Objective 5-1 and 5-2 Instructions Use the income statement and balance sheet information for Apple to fill in the missing items in the calculation of Apple's ROIC and supporting ratios. Once filled in correctly, compare Apple's performance to that of Blackberry. Where does Apple have an advantage? Where does Blackberry have an advantage? Income Statement Net sales Cost of sales Gross margin Research & development expense Selling, general & admin expense other operating Total operating expenses Operating margin Interest & dividend income Apple, Inc. YE Sept 2012 156,508 Blackberry YE Mar 2012 18,423 87,846 11,848 68,662 6,575 3,381 1,559 10,040 2,600 8 13,421 55,241 5,089 1,486 0 Interest expense Other Income / Expense 522 2 Total Other income Earnings before taxes 522 $5,763 21 Provision for taxes 14,030 354 Net income (loss) 41,733 1,153 Balance sheet Cash & cash equivalents Short-term marketable securities Accounts receivable Components Finished goods Inventories Other Current Assets Total current assets Apple Inc YE Sept 2014 Microsoft Corporation YE Man se 2012 1,527 10,746 18.383 247 3,062 10,930 0 791 1,027 1.208 16,803 57,653 7,071 Components Finished goods B 0 B 1,027 Inventories 791 1,208 Other Current Assets 16.803 Total current assets 57,653 7,971 Long-term marketable securities Fixed Assets: PP&E (net) 15,452 2,733 3,927 Other assets 102,959 Long term assets Total assets Accounts payable 176,064 6,660 13,731 744 21,175 D Accrued expenses Deferred revenue other 11,414 0 2,645 5,953 38,542 3,389 0 Total current liabilities Long-term debt Deferred revenue - non-current Deferred tax liabilities Other non-current liabilities Other long-term liabilities Total long-term liabilities Long-term liabilities Total liabilities Common stock Retained earnings Unrecognized gain on securities Total shareholders' equity Total liabilities + shareholders equity 1642 19,312 667 101,289 10 242 242 19,312 57,854 3,631 14 7,913 2,173 10,100 118,210 176,064 Execise 8a - Calculating Apple's ROIC Calculate of Apple's ROIC and supporting ratios. (Enter your responses rounded to two decimal places.) APPLE ROIC 17.00 % Tax Efficiency 135.36 % Tax Rate 7.64 % Operating Profit Margin 28.72 % COGS/Rev 67.97 % R&D/Rev 3.30 % S&GA/Rev 6.56 % Capital Efficiency 31.98 Working Capital Turn 4.62 Fixed Asset Turn 14.59 Inventory Turn 58.85 Receivable Turn 10.46 Payables Turn 5.49